Public Policy in New York City and State by Larry Littlefield

The Executive/Financial Class, the Political/Union Class, and the Serfs

We are approaching the holiday commemorating the day when, as Abraham Lincoln might have said, eleven score and eighteen years ago our fathers brought forth on this continent a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal. So I thought I’d check some data to see how the different classes in our classless society are making out. According to Local Area Personal Income data from the Bureau of Economic Analysis, in 2012 those working in the Finance and Insurance Sector in Manhattan (aka Wall Street) earned (or at least got) an average (mean) of $263,979 each in wages, salaries and non-wage benefits such as employer contributions to retirement funds and health insurance. This data, unlike most you see, includes the self-employed. The average for all the other private sector workers in Downstate New York, including top executives and the highest paid workers in sectors outside finance, was $74,306. The average for state and local government workers in Downstate New York was $100,352.

But not all state and local government workers are created equal, it would seem. According to Education Finance data from the U.S. Census Bureau, as I showed here

New York City spent $272,500 in instructional (mostly teachers) wages and benefits per 20 students – by that comparison more than the average for Wall Street. Based on data reported in the FY 2013 Comprehensive Annual Report of the New York City Police Pension Fund and the FY 2013 Budget Summary from the NYC Office of Management and Budget, the average NYC police officer cost $212,220 in wages and benefits – far closer to Wall Street than to average New Yorkers. Similar sources put the average cost per NYC firefighter at $229,140. According to the National Transit Database, the average employee of New York City transit cost $137,646 in wages and benefits in FY 2012, less than the teachers, police officers and firefighters but still nearly double the average non-Wall Street worker in downstate’s NY private sector. The average Long Island Railroad worker cost even more, at $162,851. It’s a tale of three cities, but no one tells it because the first two classes are the people one needs to suck up to in order to get ahead, and the third does not matter. Some charts and additional commentary on what this means may be found below .

Rather than continue to bore everyone by getting technical, those interested can find links to the sources and the data, along with the charts, in this spreadsheet. The links are below the data.

The first chart, with the data described above and the average compensation of downstate private sector workers outside of finance highlighted with an orange line, is here.

In a way the comparison with the $272,500 spent on teachers per 20 students is a bit unfair, because the actual ratio of teachers to students in the NYC schools is closer to 12. Then again, it is fairer than perhaps deserved because outside of special education the typical NYC class size in its schools is 25 to 34. And the average teacher works far fewer days per year than the average finance worker. Moreover, the data for finance includes all the CEOs, while the data for NYC instructional workers does not include principals and other administrators.

NYC has 2.8 times as many, relative to population, as the national average, and more than just about any other place. So that high cost per police officer is multiplied by a very high number of officers.

But it isn’t just numbers that lead me to identify the three groups as the executive/financial class, the political/union class, and the serfs. It is how the first two groups have gotten as much as they have, and at whose expense. Basically the executive/financial class and the political/union class have seized control of our public and private institutions and run them in their own self-interest, deciding how much to take off the top, and leaving the serfs with the bill and whatever is left.

Those in the executive/financial class sit on each other’s boards and vote each other a rising share of private sector income, mostly in cash, stock grants and options, and bonuses. They are the bonus rich. They compare their compensation only with each other, and push it up in an ever-increasing spiral. At first soaring executive pay was justified by “shareholder value” during the 1990s stock market bubble, but executive pay continued to soar – with no justification – after that bubble popped. Although knowledgeable people understand that today’s high stock prices are (once again) merely an artifact of the free money policies of the Federal Reserve, those in the executive/financial class continue to reward each other hugely for what is, for most, being in the right place at the right time and taking advantage. Those in the executive/financial class negotiate the deals with each other, and shareholders pay the bill.

The compensation of the political/union class is also decided in “negotiations” with itself, secret negotiations with secret provisions. This group controls state and local government, not everywhere in the United States but certainly here in New York. It has also taken more and more and more, generally in richer and richer retirement benefits as a result of retroactive pension increases. The cost is borne by less well off taxpayers and public service recipients, and that cost has been multiplied many times over by shifting it into the future, so the link between what the political/union class takes and what the serfs lose could be better hidden.

The pay and benefits of the serfs is determined in negotiations with people who have an interest in keeping them as low as possible, either to keep more money for themselves or to be in a better position to offer better value to their customers. Everyone wants to get more for less, whether they are shopping for labor or as consumers, but in the end these relationships are voluntary, so an equitable agreement has to be reached.

And over the past 40 years or so the inflation-adjusted compensation of the serfs has been going down. At first that didn’t change the way the serfs lived, and didn’t diminish the level of consumer spending in the economy. Families sent more and more family members (mothers) to work to keep total household income and spending high. Workers lost future income in retirement, not current cash, and should have cut their lifestyle and saved more to make up for it, but did not. They kept spending instead. Finally, millions of Americans just borrowed and spent more than they had, until they couldn’t borrow anymore, and went bust. I, and some others outside the mainstream, have been saying this for years, but now even columnists affiliated with the Wall Street Journal are catching on.

For decades, economic growth in America was driven by a powerful and sustainable force: increased consumption paid for by the rising incomes for middle-class and working-class Americans. But somewhere around 1980, that model broke down. Wages flattened out, but consumption didn’t. Americans cut back on their savings, and took on more debt — mostly mortgage debt — to satisfy their needs and desires.

It’s not a sustainable model, but it did persist for nearly 30 years until the credit bubble burst in 2007. Millions of Americans lost their jobs, and millions lost their homes when the credit spigot was shut off, forcing average families to cut back on their consumption and live within their means once again. And now, with the economy only partially healed, it seems we’re going back to the lend-and-spend economy that failed us before.

Which is to say the only reason the economy has improved at all in the wake of the Great Recession is because debt started rising again, but that can’t continue. Particularly since many of those workers who didn’t receive retirement benefits and didn’t save themselves are approaching old age, and facing a drastic decline in their standard of living and the amount of consumer spending they provide the economy. To the executive/financial class I say “who are you going to sell to?” In much of the country, the pace of year-over-year job growth has slowed or reversed, and we may be about to go back into recession.

The political/union class has so such worries. If it gets richer and the serfs get poorer, it can simply force the serfs to pay a higher share of their shrinking incomes in taxes, so the political/union class can get everything that it promised itself. And so you hear continued demands for even more tax increases in New York, the place with the highest tax burden in the country.

Without even higher taxes, since the serfs are getting poorer relative to the members of the political/union class they can’t afford to pay for as many of them. The members of the political/union class are not about to work harder or more efficiently to make up the difference, so services can be maintained. Instead services are cut. And what you see across the country is a spiral of tax increases and service cuts, to pay for the soaring cost of retirement benefits.

What the political/union class likes to pretend is that it is in favor to taking more from the executive/financial class, while holding the serfs harmless. But because the amount grabbed by the executive/financial class is not only unjustified but also unsustainable, that strategy is not going to work in the long run. It particular, either the average pay in New York’s financial sector is going way down, or someday New York is not going to have a big financial sector anymore. As it is, average pay in this sector was down 6.4% from 2001 (during the dot.com bust) to 2012, adjusted for inflation. Total earnings in the sector were flat.

I’m reminded of the 1960s song “I’ve Love to Change the World” and the lyric “Tax the rich, feed the poor, ‘til there are no, rich no more.”

No rich no more? Then what? Whom do you tax then?

Well if the political union/class really was taxing the rich to feed the poor serfs or provide them with services, it could just say “sorry, no more money,” blame someone else and let the serfs starve, as in New York in the 1970s. But public employee pensions are another matter. Those have to be paid regardless.

The mean inflation-adjusted compensation for Downstate New York private sector workers outside of finance was 1.5% lower in 2012 than it had been in 2001 (and 2001 was hardly a good economic year in New York), but the mean compensation of downstate state and local government workers was 12.3% higher. Frankly I’m surprised downstate’s private sector workers did that well in the aggregate, but then there are plenty of members of the executive/financial class here outside of finance to pull up mean earnings.

Median earnings are less affected by those at the top. Based on the 2000 Census of Population for 1999, and the 2012 American Community Survey, median earnings per full time year-round worker living in New York City fell 5.2% over those years for males, and 0.7% for females. That’s gentrification? The so-called young gentry are living four to a room. And still they are coming here, because things are worse elsewhere.

Take Upstate New York, where the average total compensation per private sector worker was just $35,382 in 2012, down 5.5% from 2001 after adjustment for inflation. The average state and local government workers earned $80,773 in wages and benefits in 2012, up 15.1% since 2001. Note I kept the scale the same in the two previous charts. No wonder local government employment has started to fall in the portion of New York State outside New York City – and the public employee unions are demanding the “progressive” policy of bigger property tax increases in response. Those in the political/union class may feel they “deserve” the average of $80,773, and more. Fine, but how are people with less than half the earnings going to be able to pay for it? Are members of the political/union class willing to pay that much in taxes themselves?

As it happens, there are in fact some other benefits besides high compensation that the executive/financial class and political/union class have arranged for themselves at the expense of the serfs. Differential treatment with regard to taxes, for example.

Because the executive/financial class controls the federal government, its members pay income taxes at a far lower rate than the working serfs, as they arrange to take their income in the form of capital gains. Labor income at less than the Social Security cutoff, in contrast, is taxed twice at the federal level, at the state level, by the MTA and, in New York City, at the local level as well.

Because the political/union class controls the State of New York, all that public employee pension income is exempt from state and local income taxes, no matter how high it is an no matter how young the former public employee retires. And there are moves afoot to have retired former public employees pay less than workers in property taxes as well.

Then there are contracts, and the lack thereof.

When times get better the members of the executive/financial and political/union classes take more, since there is “plenty of money” and the serfs are unaffected. But in each recession the serfs are made to pay more and accept less, because they are don’t have a contract. So what the serfs get slowly ratchets down, what they pay slowly ratchets up, all due to “circumstances beyond our control.” Mayor Bloomberg inherited “uncontrollable costs” due to past contracts, and passed on more of them.

Members of the executive/financial class grant each other employment contracts specifying what each of them will get, even if the company is run into the ground, before a dime goes to shareholders. Members of the political/union class also negotiate contracts with each other that are irrevocable and must be paid regardless of the consequences for the serfs. The serfs are generally at-will employees and have no employment contracts. They can take it or leave it today, and are always at risk of having their pay and benefits cut tomorrow.

Then there are inflation adjustments.

Members of the executive/financial class expect their compensation to go up by more than inflation each year. Under labor relation laws arbitrators generally grant unionized public employees cash wage increases at or above the inflation rate, even as their pension costs soar, and even as the pay and benefits of the serfs trails inflation. One of the pension increases in New York in recent years was an automatic increase in pension payments for inflation. Social Security has been automatically adjusted upward for inflation, for the benefit of “seniors on fixed incomes,” since the 1970s. The minimum wage is not automatically adjusted for inflation, as has fallen behind it since about the same time. The lower pay of low-wage workers keeps the cost of services down for seniors, active and retired public employees, and executives.

In New York, the three classes end up living different lives.

The executive/financial class rides around in taxis and black cars, or drives their own luxury cars to paid-for corporate parking spaces, lives in the wealthier parts of Manhattan or the more affluent suburbs, and sends its children to private or upscale suburban schools. Not regular New York City schools.

The political/union class drives its own or city cars to public parking spaces reserved for it by placard, lives in the middle-class suburbs (they are no longer required to live within the city) or in a limited number of suburban-type city neighborhoods, and sends its children to suburban or “special” city public schools. To the extent that in the past there were special “middle income” housing deals on offer, such as Mitchell-Lamas, the political/union class got them, often through insider information. In general, however, New York City’s political/union class shuns the New York City public services it produces, opting for a better deal elsewhere. And runs to Florida with its winnings as soon as it can.

The serfs include the unorganized working class, younger public employees and other union members on the wrong end of the repeated cycle of “screw the newbie, flee to Florida” contracts, young college graduates trapped in “freelance” jobs without benefits, immigrants, anyone who starts a small or new business in New York, everyone else really. They ride around by subway, ride bicycles or walk, or if they drive have to compete for scarce legal spaces. They often lack health insurance and generally lack pensions. They are squeezed by soaring real estate costs into less and less space for more and more of their income. They are neither rich enough to live well without public services, nor have enough connections to ensure privileged access to them when good ones are in short supply. Parochial schools had been a lifeboat for some of the serfs, but it is sinking. Charter schools are a lifeboat for some of the serfs, but the United Federation of Teachers wants to take it away.

Both the executive/financial class and the political/union class have an enormous sense of entitlement. They certainly don’t react well if anyone questions the deal they have taken for themselves and its effect on the serfs; they don’t want to hear any comparisons between themselves and the serfs at all. Thus the “outrage” at the “Socialist” President Barack Obama every time he has dared to meekly question the distribution of income in this country. And the outrage at the “right wing,” “not-progressive” Governor Andrew Cuomo for suggesting that a more limited pace of tax increases – from what is already the highest state and local tax burden in the country – is all the serfs can afford.

Another thing you hear is the accusation of “envy.” The idea that the serfs resent what the executive/financial and political/union class get because they are left behind, even though it has nothing to do with them. That is both an insult and a lie. Back in the 1990s stock boom, when it productivity and the wages of average workers was rising along with the stock market, average people did not resent the rise in executive pay. It was only when people realized that they had become worse off to pay for it that some of them began to resent it.

Same thing with the political/union class. The fact that government workers get relatively good benefits is not new and was not unknown. Nobody cared – good for them, they made other sacrifices in exchange, people believed. Even when those already rich retirement benefits were retroactively enriched nobody cared, because it was done in secret, not widely reported, and not paid for. It was only when the tax increases and service cuts started as a consequence – when the serfs began to realize they were being made worse off to pay for increased benefits for those who had richer benefits to begin with – that people began to become upset.

So the executive/financial class and the political/union class have grabbed more and more for themselves, and in the end this has left everyone else worse off. How do they feel about it? Far from being grateful for what they are getting, compared with what everyone else is getting, and determined to do more in return to justify it, members of both the executive/financial class and the political/union class feel underpaid and disrespected, and are demanding even more.

Even as the cost of their 2008 retroactive pension increase, multiplied by the 2000 pension increase, the 1995 pension increase, and various early retirement incentives, soars and drains the schools, the New York City teacher’s union encourages its members to resent the fact that they aren’t getting $billions more in immediate retroactive cash payments as well. Who would sacrifice what to pay for it? They demand not to be asked that question.

Ever wonder what would happen if teachers were paid like Wall Streeters? Apparently, what you get is the New York City school system. Whatever happened to the idea that “to whom much is given, much will be required?” The UFT does not want anyone to know how much has been given, or take, and does not believe much is required in return.

The New York City police are apparently unwilling to protect New Yorkers from traffic violence, because they are only given $212,220 each in total compensation, and the city will not increase their staffing beyond 2.8 times the U.S. average number of police officers. That’s the position taken by the “progressive” head of the City Council, who claimed that New Yorkers shouldn’t expect projection unless they are willing to pay for yet another 1,000 officers. The police union is also pushing through yet another retroactive pension increase, with more disability pension payments, a few months after a disability scandal was made public.

And Long Island Railroad workers, already paid more than New York City Transit workers despite doing a less good job, are being offered a bigger wage increase than New York City Transit workers received. This in the wake of the revelation of widespread disability fraud at the LIRR. Their response? Give us more or we strike.

With the demand that politicians not “negotiate in the press,” one never hears demands of the political/union class on behalf of the serfs. Instead, all one hears is demands by the political/union class to charge the serfs more or give them less.

New York City’s public unions don’t want to hear that they are as rapacious as Wall Street, and they have the power to shout people down, which is why you are looking at this data on a blog and not hearing it from elected officials or in the media. But it is so. And the executive/financial class likes to pretend that its compensation is set in arms-length negotiations in a free labor market, and is not the product of mutual back-scratching deals. In reality, however, Americas top executives and board members are in fact a de facto union, the most powerful and rapacious in the country.

But the issue is not unions per se. The issue is coercive monopoly power. The serfs live in a world of voluntariness. They always have to be concerned that if they don’t treat others fairly, those others will decide to no longer continue their voluntary relationship. They’ll lose their customers, their job, their friends. In a world of voluntariness, at least some empathy is required to get by. Private sector unions that lack monopoly power are in the same position. If they take too much their employer’s customer might go elsewhere, leaving them jobless. In our society, however, those with the power of coercion and monopoly power seem to be unable to resist using it, particularly since no one will call them out on it.

In fact, voluntariness could be the serfs salvation if the overlords didn’t take it away. If the political/union class and the executive/financial class have seized control of existing public and private organizations and are running them in their own self interest, the serfs could cut ties and choose to deal with less expensive, fairer new organizations instead. Except with regard to the government they are forced to pay taxes regardless of what if anything they get in return. And through the government’s support of large powerful private organizations, they are forced to pay for those as well.

The serfs are a diverse group, with varying levels of education and income and different occupations. Thus they are not organized as such. Not all even realize they are the serfs, although over time that realization is slowly spreading. The executive/financial class and the political/union class have kept the serfs quiet by taking more and more off the top but deferring the consequences to the future, in soaring debts, unfunded pension liabilities, and in adequately maintained infrastructure. By the time the serfs realize they’ve been robbed, the getaway is a decade or more in the past, with the trail covered by rationalization and fraud.

No political party represents the serfs. Some of them rose up to create the Tea Party and Occupy Wall Street, but the former was quickly taken over by the Executive/Financial class, and the latter quickly fell apart.

And what about the media? If the entitlement of the executive/financial class and the political/union class isn’t being challenged, then it is being fed. The serfs need to be told they are the serfs. But the only people paying to get a message out are the political/union class and the executive/financial class, and the only message getting out is the message that is paid for. Except, perhaps, for blogs. I hope this post will help some of the serfs, particularly the younger serfs, wade through propaganda and see things as they are.